CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
An equity fund managed by a Chennai firm returned 15% during the year against 12% for its benchmark index. The fund's tracking error (standard deviation of active return) was 4%. What is the fund's information ratio?
The information ratio is 0.75. It is the active return over the benchmark, 15% minus 12% = 3%, divided by the tracking error of 4%. It measures excess return earned per unit of active risk taken relative to the benchmark.
- A0.75Correct
- B1.33
- C3.75
- D0.25
Explanation
Information ratio = active return / tracking error = (15 - 12) / 4 = 3 / 4 = 0.75. The 1.33 option inverts the ratio. The 3.75 option divides the total fund return by tracking error rather than the active return.
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